The Commerce Department recently reported a second consecutive decline in US gross domestic product (GDP). While this is not a definitive indicator of a recession, it is a key indicator. The Federal Reserve also said it was more concerned with fighting inflation than preventing a recession.
All this news aside, it actually might not be that bad. I know a doomsday article typically gets more readers, but in this case, the equipment rental industry has good winds to push it through a recession. First, let’s address why it might not be so bad. So, we’ll cover some best practices in case there is a more brutal recession.
Interest rates are rising and that could be a good thing. This probably sounds strange because an industry typically shrinks when interest rates go up. This is especially true for sectors that use debt to finance growth and businesses, such as the equipment rental sector.
However, rising interest rates are more good than bad for equipment rental companies because it also affects contractors. For most of the past decade, the federal funds rate has been historically low, translating into interest rates on equipment purchases at or near 0 percent. When a contractor makes the decision between rent and purchase, the cost of the new equipment is a huge factor. Not only has the price of new equipment increased significantly, but the possibility of financing it “for free” has disappeared. This should increase the perceived value of the rent and increase the likelihood that contractors will outsource rather than buy.
In addition, periods of looming recession create uncertainty for contractors. If you’re not sure how good business will be in six months or a year, would you make a long-term investment in an expensive asset or would you choose to wait and lease it in the meantime? You are much more likely to choose the low-risk option of renting the necessary equipment.
These two favorable winds are expected to increase rental penetration and encourage more contractors to see rental value, which will be good for the equipment rental industry. There is still a chance that a recession will get worse. If so, there are still opportunities to take the lead.
The most significant opportunity is in the staff. According to a recent survey by the American Rental Association (ARA), historically low unemployment coupled with the long-term trend of low merchant availability has left equipment rental companies understaffed by 30%. If the recession widens to increase unemployment, this could increase your access to talent and allow you to grow your team even as the demand subsides. The key would be to increase staff to meet anticipated demand levels instead of current ones.
Not all geographies and segments are treated equally in a recession. So, if you happen to find yourself in a niche market or product class that struggles more than others, there is more you can do. You would like to slow down or stop hiring. If you need to reduce staff, start by taking advantage of natural friction. If that’s not enough, aim for a deep cut versus more minor cuts. Layoffs are brutal for morale, but multiple layoffs are worse.
Work to collect and preserve money, but if you have substantial cash reserves, invest in training and upgrading the skills of the staff you care. The good times will return. If you are ready to jump out of the gates with a highly skilled team, you have the opportunity to gain market share. Finally, if you feel that business will slow down, agree with the missing rents. One of the worst things to do in the event of a slowdown is to be overweight on the fleet. If you don’t miss out on rentals, at least occasionally, you are overcrowded.
It is always dangerous to say that this time is different, but what is happening now is unlikely to repeat itself in 2008-2009. I see more opportunities this time around, reflected in our five-year ARA Rentalytics ™ industry forecast which is updated quarterly. Our most recent update in August expects at least another two solid years of growth. We have not made any downward revisions to our projections for 2022 or 2023 and we still expect at least two solid years of growth for the equipment rental sector.